The Myth of the Zero Sum Game

This striking declaration from Gordon Gecko, Michael Douglas’ notorious character from WallStreet,defines free enterprise for many people. It portrays the system as dog-eat-dog competition. Winners always create losers.

This view represents the Zero Sum Game Myth, the third myth in our series on the eight most popular myths of wealth, poverty, and free enterprise.

Myth #3: The Zero Sum Game Myth – believing that trade requires a winner and a loser.

One reason people believe this myth is because they misunderstand how economic value is determined. Economic thinkers with views as diverse as Adam Smith and Karl Marx believed economic value was determined by the labor theory of value. This theory stipulates that the cost to produce an object determines its economic value.

According to this theory, if you build a house that costs you $500,000 to build, that house is worth $500,000. But what if no one can or wants to buy the house? Then what is it worth?

Medieval church scholars put forth a very different theory, one derived from human nature: economic value is in the eye of the beholder. The economic value of an object is determined by how much someone is willing to give up to get that object. This is the subjective theory of value.

…the price of goods does not depend on their nature but on the extent to which they serve the needs of mankind…the Late Scholastics posited the idea that the value we place on goods depends on the utility we derive from them.

Human beings, created by God with unique needs, preferences, and opinions, will derive different value from different goods. This led medieval Christian scholars to conclude that value is subjective. Chafuen writes,

The Late Scholastics believed that the pleasure that people derive from different goods is subjective and arises from variability of human opinion, so that different people esteem goods differently.

A clarifying point about “subjective” is needed here. To say “economic value is subjective” is not to say “everything is relative.” We’re talking about economic value, not ultimate value. Your ultimate value in the eyes of God is not the same as economic value.

All of us are created in God’s image. Our equal value and dignity as persons doesn’t vary with the wants and needs of consumers in the marketplace.

Win-Lose, or Win-Win?

How you determine economic value affects whether you view free enterprise as a zero-sum game, or a win-win game in which both participants benefit.

Let’s return to the example of the $500,000 house. As the developer of the house, you hire workers to build the house. You then sell it for more than $500,000. According to the labor theory of value, you have taken more than the good is actually worth. You’ve exploited the buyer and your workers by taking this surplus value. You win, they lose.

Yet this situation looks different according to the subjective theory of value. Here, everybody wins. You market and sell the house for more than it cost to produce, but not more than customers will freely pay. The buyer is not forced to pay a cost he doesn’t agree to. You are rewarded for your entrepreneurial effort. Your workers benefit, because you paid them the wages they agreed to when you hired them.

This illustration brings up a couple important points about free enterprise that are often overlooked:

1. Free exchange is a win-win game.

In win-win games, some players may end up better off than others, but everyone ends up better off than they were at the beginning. As the developer, you might make more than your workers. Yet the workers determined they would be better off by freely exchanging their labor for wages, than if they didn’t have the job at all.

A free market doesn’t guarantee that everyone wins in every competition. Rather, it allows many more win-win encounters than any other alternative.

2. The game is win-win because of rules set-up beforehand.

A free market is not a free-for-all in which everybody can do what they want. Any exchange must be free on both sides. Rule of law, contracts, and property rights are needed to ensure exchanges are conducted rightly. As the developer of the house, you’d be held accountable if you broke your contract and failed to pay workers what you promised.

An exchange that is free on both sides, in which no one is forced or tricked into participating, is a win-win game.

Dr. Jay W. Richards

Jay W. Richards, Ph.D. is author of Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem and New York Times best-selling books, Infiltrated, and together with co-author James Robison, Indivisible: Restoring Faith, Family, and Freedom Before It’s Too Late.

“Human beings, created by God with unique needs, preferences, and opinions, will derive different value from different goods.”TwitterFacebook

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capacitated

Using a newly-constructed house is perhaps not the best-to-cite example of win-win.

The homebuyer is willing to pay more than the builder’s cost of production because the purchaser receives a bundle of tangible and intangible government-enabled benefits.

Presuming the buyer obtained a mortgage in financing the purchase, the buyer can count on substantial tax breaks for mortgage interest and property taxes, especially in the early years of the mortgage. In most states, the homeowner enjoys preferential property tax rates for the duration of ownership. A fixed-rate mortgage ensures the homebuyer enjoys a principal-and-interest payment which will never increase, thereby insulating the homeowner from the cost shocks frequently experienced by renters. And that mortgage has a finite duration; ultimately the homeowner will have a monthly payment of zero. Try doing THAT with rent!

On the other hand, the traditional residential landlord-tenant relationship IS a zero-sum game. Wealth changes hands from tenant to landlord The landlord enjoys additional gains in the form of tax breaks, principal reduction, and property appreciation. Renting is where you pay a premium to enjoy temporary, impaired use of property, and where in the end you have nothing to show for your greater expenditure. Every income property is someone else’s outgo property.. It is hardly a surprise that homebuyers are happy to pay a builder more than the cost of production: it beats the pants off renting.

In the context of government-regulated markets – minimum lot size requirements prevent me from purchasing property in an increment I can afford – many renters are not making a truly free exchange.